QUESTION 3 [25 Marks]

INFORMATION An entrepreneur recently opened a filling station. Diesel is sold at R15 per liter and the variable costs total R12 per liter. The fixed costs per month are R270 000. After six months of trading, the sales achieved were 1080 000 liters and the sales volume has remained at the same level each month. In an attempt to improve performance, the entrepreneur is considering the following proposals:

Proposal 1

Customers will be allowed to purchase diesel on credit. It is estimated that 50% of the average monthly sales (in litres) will be to customers who would take advantage of this opportunity. Sales to these customers should increase by 20%, as they are expected to buy exclusively from this filling station. Sales volumes to customers who do not take advantage of the credit policy are expected to remain unchanged. Additional costs arising from this proposal are expected to be as follows: Bad debts of 1% of the sales in respect of customers who use the credit facility. Fixed administrative costs of R18 000 per month.

Proposal 2

The entrepreneur wants an operating profit of R301 625 per month. To achieve this the following changes are suggested: Selling price is reduced by R0.20 per litre. A sales commission of R0.50 per litre sold will be granted to the fuel attendants. An additional R5 875 per month will be spent on advertising.

Proposal 3

The possibility of only operating from 06:00 to 20:00 is being considered. This earlier closing time is expected to result in a loss in sales of 25 000 litres on average per month. It is hoped that the saving in fixed costs resulting from the reduction in operating hours will enable the entrepreneur to achieve an average monthly profit of at least R300 000.

REQUIRED Study the information provided below and answer each of the following questions independently:

3.1. 3.2. 3.3.	Calculate the operating profit/loss at the end of the first six months of operations. Calculate the break-even value per month during the first six months of operations. Calculate the total Operating profit/loss per month, if Proposal 1 is implemented.	(5 marks) (5 marks) (5 marks)
3.4.	How many liters of petrol need to be sold to achieve an operating profit of R301 625 each
month, if Proposal 2 is accepted?	(5 marks)
3.5.	Calculate the reduction in monthly fixed costs that is necessary to yield a profit of R300000, if
Proposal 3 is accepted.	(5 marks)